The biggest bounces come in bear markets. 

Now I’m not saying we’re in a bear market; the SPY is only 1% off all-time highs. But I see some really weak market internals. In fact, I’ve cut most of the positions in my portfolio and am in the most CASH I’ve been for a very long time. 

You can read more about why I’m focusing on Protecting my Ass…ets right now. 

I believe that there is a flight to safety going on right now, which is why so much money has been going into AAPL the last few days. Without broad participation of stocks in this rally, I believe we could be in for much more volatility and thus falling stock prices ahead.

I’ve chosen to express my bearish thesis on the market by getting short in NVDA through the purchase of Put Spreads.

Here’s My trade:

NVIDIA Corporation (NVDA) operates as a visual computing company worldwide. It operates in two segments, Graphics and Compute & Networking. The Graphics segment offers GeForce GPUs for gaming and PCs, the GeForce NOW game-streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise design; GRID software for cloud-based visual and virtual computing; and automotive platforms for infotainment systems.

Due to the chip shortage and NVDA’s competitive advantage in Graphics chips, NVDA has been struggling to meet customer demand, such as the popularity of its products. NVDA graphics cards are used for gaming, bitcoin mining, AI, and autonomous driving solutions. Since October, NVDA is up over 50% from a price of $200 to over $300 as I write this. 

NVDA is a high-growth, high Beta market stock. High Beta means that NVDA will usually move much more than the indexes, whether it is up or down, similar to how TSLA trades. Thus, if the market turns bearish, which I think it might soon, NVDA is one of the stocks with the most downside due to its significant range and large momentum moves. 

Technicals

NVIDIA Corp (NVDA) is trading under two interesting resistance levels, with the Descending Trendline Resistance Level and the Prior High Resistance Level converging.

And I feel that the bulls will start to take profits at the resistance levels and maybe some bears will step in around here.

At this point, I’m going to keep an eye on what the 13, 30, and 100 hourly moving averages are going to do with the bulls. If there is any momentum left in this trade, I will expect the bulls to step in around those key levels.

The Trade

I began the trade with a starter late Monday by buying 20 puts at the $305 strike for $16.27 and selling 20 puts at the $270 strike for $4.27. The idea was that I would slowly scale into this trade if it moved against me as I anticipated to have a larger position at a better average price. This is all premeditated so that I have the best price possible for the trade and am at the same time fully in control of my risk.

Yesterday on Wednesday, I added to the position in the morning as NVDA opened higher by buying 70 more puts at the 305 strike price. I plan to sell puts against that if NVDA has another sharp drop. That is “legging” into the spread. Although this trade is moving against me, NVDA is at a resistance area which I expect to hold. The puts expire on December 23, so I have a couple of more weeks for the trade to work.

Right now, I believe AAPL is holding the entire market higher, and if that begins to show some weakness, I expect the entire market to roll over somewhat, with momentum stocks such as NVDA and TSLA moving the most. $290 is a support area for NVDA, which I definitely think it could test in the next week. If that were to happen, it would be a head and shoulders pattern. Some market volatility and a break of this level puts a gap fill into $265 into play, which would be an extreme market move but very possible.

Bottom Line

I am bearish on the market. I believe the SPY is being held up by AAPL due to a flight to safety trade into the new year. If market volatility was to return, I see the entire market selling off again as it did last week. 

This is why I am high cash and focused on protecting the downside. 

If a market selloff was to occur, NVDA would probably be one of the stocks with the most downside, given its high Beta momentum nature. I have initiated a short position by buying a put spread. The trade is currently going against me, but I expect the resistance around these levels to hold and a selloff in NVDA over the next week or two.